Korea needs new model for economic dynamism

By Lee Chang-sup

Last week, the government announced two contrasting statistics: according to Statistics Korea, the nation is cruising toward record exports, but about 49 percent of Koreans see themselves as poor. These two figures reflect the stark reality of the Korean economy today.

This year, Korea has set many records in trade, but data shows these economic achievements have not necessarily trickled down to the rest of the economy.

Korea is expected to post its largest export figure, about $560 billion, this year. For three consecutive years, exports and imports would exceed $1 trillion. In addition, trade surplus, the difference between exports and imports, would top $43 billion. Koreans call these records the "triple crown.''

What's more, Korea is about to overtake Japan as the biggest exporter to China. Korea seeks to become the world's fifth largest trading country by 2020 by doubling trade to $2 trillion.

While these statistics are a source of pride for the country, they do not seem to do much for the rest of the economy. Data shows the increase in trade did not lead to a corresponding hike in jobs, wages, and economic growth. For instance, for the past five years, exports grew 47 percent and personal income at only 1/9th the rate with 5 percent.

The role of big companies in exports has been growing. Big enterprises accounted for 68.1 percent of exports in 2006 and 81.3 percent in 2012, according to the Korea Federation of Small- and Medium-Sized Enterprises.

Yet, despite the record trade, manufacturing jobs have decreased. Big companies accounted for only 23.3 percent of manufacturing jobs in 2011, down from 24.2 percent in 2006.

A Seoul economist says except for a few chaebol including Samsung and Hyundai, companies did not benefit much from the growing exports.

In the past, exports powered the entire economy. In 1977, when exports surpassed $10 billion, per capita income surpassed $1,000. In 1995, when exports rose to $100 billion, per capita income shot to $10,000. In 2007, when exports amounted to $371 billion, per capita income exceeded $20,000. Since then, however, the linkage between exports and personal income has weakened.

Why, in recent years, didn't increase in exports lead to a similar jump in people's welfare? The reason is big companies such as Samsung and Hyundai create more jobs overseas than at home as their exports increase. For instance, although Hyundai Motor exports 10 million cars each year, it produces half of its cars overseas. Samsung Electronics, the largest exporting company in Korea, also produces the bulk of its smartphones in other parts of the world.

In addition, while big Korean exporters have more than doubled overseas investments from $47 billion over 2003–2007 to $105 billion over 2008–2012, they did not make significant domestic investments. Instead, they kept much of their export earnings. The Korea Exchange reported that 82 listed companies linked to 10 chaebol hiked their internal reserves by 43.9 percent over the past three years.

Despite the record per capita income, 46.7 percent of Koreans think they are poor for several reasons. Real income has been decreasing since 2008, but tax burden has been rising. Korean households have accumulated a record debt of nearly $1 trillion, equal to the GDP of the country. A sense of relative deprivation prevails in Korea. Many Koreans, especially young people, compare themselves to others and assume that they have less of what they are entitled.

Last week in Seoul, International Monetary Fund (IMF) Managing Director Christine Lagarde advised Korea to cut the current account surplus down to a manageable level. A good way to do so is to strengthen the Korean currency's value. Because the government keeps the currency at an artificially cheap level, Koreans pay subsidy to exporters and pay additional tax on imported goods.

Second, Korea must stimulate the services sector, which has great potential for creating jobs. The services sector has long been neglected, and consequently, its productivity has remained less than that of manufacturing.

Third, workers should refrain from demanding high wages so that manufacturing companies like Hyundai and Samsung can create more jobs in Korea. Indeed, a job with a small salary is better than no job at all. In addition, Korea should adopt an active immigration policy to import workers for manufacturing jobs that Koreans do not want. France, for an instance, has powered its economy through foreign workers in the 1990s. An active immigration policy will counter Korea's fast-aging population. The IMF projects Korea will have one of the oldest populations in the OECD by 2050.

Fourth, the National Assembly should become bipartisan, at least in boosting the economy. Everybody worries that the social and ideological division in the Korean society is at a dangerous level. The OECD reports that Korea ranks 22nd in the social capital index, an indicator of how society forms consensus for solutions. Samsung Economic Research Institute estimates Korea sustains a loss in amount about one-quarter of its GDP because of social conflict.

Koreans, including policymakers, lawmakers, and workers, know ways of pulling the economy out of stagnancy, but they are slow in taking action.

Resource-poor Korea cannot simply scrap its export-oriented growth strategy. However, the public cynicism over the record trade data is not without basis. Korea needs to balance trade and domestic demand.

Lee Chang-sup is the executive managing director of The Korea Times. Contact him at editorial@koreatimes.co.kr,